Blender not running under IIS7
After 30 hours of trying, I am very happy that I made it work! Not sure whether this workaround is safe, but yet it works for Blender 2.78:


Rename blender-dir\2.78\python to something else, e.g. blender-dir\2.78\python-old
Download the embeddable zip of Python 3.5.3 from https://www.python.org/downloads/release/python-353/
Unpack its content to blender-dir\2.78\python (a new directory using the same name)
Unpack its blender-dir\2.78\python\Python35.zip to blender-dir\2.78\python\lib
Copy contents of blender-dir\2.78\python-old\lib\site-packages to  blender-dir\2.78\python\lib\site-packages except for __pycache__ directories
I am not sure yet whether any other files or directories need to be copied from python-old\lib to python\lib, if yes I will update the answer.
Find all __pycache__ directories in blender-dir\2.78\scripts\ and delete them
Copy blender-dir\2.78\python\python35.dll to blender-dir replacing the old python35.dll


So the issue is resolved by pushing in Python 3.5.3. I hope Blender will bundle it in its next release. In the meanwhile, please let me know in a comment in case anyone else encounters a similar problem :)